Asian Appetite for Luxury Grows

June 11th, 2013 - How companies can gain a competitive edge in one of the world's richest markets.

Growing demand for luxury goods in Asia, fueled by a continued shift in consumer spending power accentuated by the global economic crisis, is drawing many luxury brands to the region.

World-renowned companies such as LVMH Group, L'Oréal, Gucci and Prada are all hoping to profit from surging Asian demand.

Sales of haute couture, cosmetics, jewelry, watches, perfumes and other luxury goods in China will grow an impressive 25% this year, according to recent estimates by consultants Bain & Company. The rest of the Asia-Pacific is expected to show 15% growth.

Meanwhile, mainland China will rank the third-largest luxury goods market in the world within the next five years, according to the same estimates, behind only Japan and the U.S..

But as Asian consumers boost spending on high-end products, so they are becoming more demanding, putting pressure on the luxury-goods makers to ensure their handbags, perfumes or stilettos reach the stores in a timely fashion.

“Consumers want their luxury products straight away,” says Yves Laforgue, managing director of SDV Logistics in Singapore. “There is the danger they will switch to another brand if the product is not available immediately.”

Given the logistical challenges of transporting goods from Europe to Asia, many manufacturers are rethinking their supply chain to gain a competitive edge and ensure they have sufficient stock to meet demand. “Luxury-goods companies are under pressure to be more reactive, flexible and closer to their Asian clients,” notes Laforgue.

Many are turning to regional distribution platforms instead of shipping their expensive goods directly from Europe to individual Asian markets. Shipping directly can prove costly because of the high rates for air freight and the need to have dedicated stock in each country, Laforgue warns.

Under the regional distribution model, companies ship their goods to the central Asian hub and then the products are labelled and customized for different markets. This can prove an effective way to cut time-to-market, costs and stock, says Laforgue, especially in the perfume and cosmetics industries.

SDV manages several regional distribution platforms in Singapore, servicing around 50 large clients including high-end clothes manufacturers and other luxury-goods groups. Laforgue says he's adding around two new major clients a year, reflecting the increasing popularity of the model.

Regional hubs can efficiently customize cosmetics gift sets destined for duty-free shops, for example, as the packaging is typically produced in Asia. Assembling these sets in Europe makes little sense, Laforgue notes, especially given the

lower cost of labor in Asia. Meanwhile, Singapore offers an attractive distribution hub because of its free-trade zone status where manufacturers do not pay duty on cosmetics and fashion goods that will be re-exported.

Singapore also has the advantage of a central location in Asia. It is the first port of call from Europe with a transit time of between 18 and 20 days from Europe compared to between 25 and 30 days for the rest of Asia. Singapore is then just two to six days by sea from any individual Asian country. Companies with stock in Singapore can therefore be more reactive to the needs of their clients without being forced to send their goods by air, Laforgue notes.

Using distribution hubs can present challenges, however. “The platform model may need extra organization,” says Laforgue. “It's not essential to have an invoicing and customer service centre in Singapore, for example, but it is advisable to be in the same time zone as the client.”

As they experience rapid growth, some luxury-goods manufacturers have simply not taken the time to focus on the logistics of the Asian market. A strategic makeover could add new luster to their business. “Better serving your customers is always a good way to grow revenue,” Laforgue notes."

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